Intel (INTC -0.38%) is, according to IC Insights, the second-largest chip company in the world by revenue, behind only Samsung (NASDAQOTH: SSNLF). That success has largely been a result of the company's dominant position in the personal computer and data center server processor markets, two segments that combined made up nearly 85% of the company's revenue last year.
During the company's investor meeting in February of last year, management talked about its efforts to grow its total addressable market -- or TAM, for short -- beyond the PC and data center server processor markets. One way the company is doing that is by building out its Internet of Things Group, or IoTG.
Image source: Intel.
Here, I'd like to go over the basics of that business.
What markets does it serve?
The phrase "Internet of Things" can refer to a very wide range of devices, so it's hard to tell just from the name of the business unit what markets Intel's IoTG serves. According to a description of the business found in the company's most recent annual regulatory filing, the segment "develops and sells high-performance Internet of Things compute solutions for retail, automotive, industrial, and video surveillance, along with a broad range of other embedded applications."
During its stockholder meeting back in May, the company claimed that, by 2021, it expected the TAM within the Internet of Things market would be roughly $30 billion.
It's rapidly growing
Intel's IoTG has delivered solid revenue growth since 2013, as you can see in the table below:
| Year | 2014 | 2015 | 2016 | 2017 |
|---|---|---|---|---|
| IoTG revenue (in millions) | $2,142 | $2,298 | $2,638 | $3,169 |
| IoTG revenue as % of total | 3.83 | 4.15 | 4.44 | 5.05 |
| IoTG Revenue growth rate | 18.9% | 7.3% | 14.8% | 20.1% |
Data sources: Intel earnings releases , Intel 10-K filing, author's calculations.
Although the segment represents a small portion of Intel's overall revenue today, it's growing rapidly and it's becoming a larger part of the overall business as its growth rate has outpaced Intel's overall growth rate for a while.
During the first half of 2018, the segment exhibited strong growth, too, with sales up about 19.4% compared to where they were in the first half of 2017. With that said, interim CEO and CFO Bob Swan did warn on the company's July 26 earnings call that "the Wind River divestiture, which closed in the second quarter, will have a negative impact to [IoTG] revenue of approximately $150 million in the second half of 2018."
It's solidly profitable
Intel's IoTG is also solidly profitable and, following a drop in 2015 (which Intel attributed to "continued investment in product development across our operating segments, including the Internet of Things market segment"), operating income has been on the rise, as you can see here:
| Year | 2014 | 2015 | 2016 | 2017 |
|---|---|---|---|---|
| IoTG operating income (in millions) | $616 | $515 | $585 | $650 |
| IoTG operating margin | 28.8% | 22.4% | 22.2% | 20.5% |
Data sources: Intel earnings releases, author's calculations.
The segment's operating margin percentage has been moving down in recent years, but during the first half of 2018, IoTG operating income surged almost 93%, dramatically outpacing revenue growth. This led to IoTG operating margin of 27.3% during that period, up from 16.9% in the first half of 2017.
I look forward to keeping an eye on this business's revenue growth, operating income, and overall contribution to Intel's business in the years ahead. We'll get our next update on how the business performed when the company reports earnings on Oct. 25.
